Why Do People Want A Gold Standard When History Shows Us It Does Not Last?

It is curious to me that so many libertarians are dead set against any form of currency other than gold when history has made it abundantly clear that a gold standard can not be maintained.

Consider that as soon as gold is represented by paper (or digital account balances), all the checks against inflation of the money supply that gold provides are lost.  In order to argue that gold can not be inflated, one must also argue that all transactions in the economy must take place using physical specie.

Clearly this presents a problem in our digital age.  Imagine trying to buy something from Amazon.com.  You would have to place an order, and then mail your gold bullion to the seller.  There could literally be no digital accounts of gold at all if one wanted to ensure that the money supply could never be co-opted and inflated.  Obviously this would require the imposition of State rules to prevent people from digitally representing gold for its use as a money.

Clearly in order for gold to function as a currency in our modern age, it must be represented either by paper or digital account.  Which means it is ultimately of no more use in preventing inflation than if the government simply created rules today outlawing the inflation of dollars.

Inflation of the money supply under a gold standard is replete throughout history.  The US banks did it, European banks did it, every one did it!   In fact, fractional reserve banking itself is a direct by-product of the gold standard.  The first instances of fractional reserve banking came into existence when banks began issuing more receipts for bullion than they actually had in reserve.  Nothing physically prevented them from doing this.  They might have to face market consequences for this fraud, but obviously it would be better if the monetary system simply prevented them from committing this fraud in the first place!

Really think about this for a minute.  If the government made a law today that eliminated fractional reserve banking and froze the number of dollars in circulation at a fixed level, how would that be functionally any different than a gold standard?    Would it even matter if those dollars were backed by gold or not if the money supply could not legally be inflated?

The arguments in favor of a gold standard all revolve around the idea that physical gold can not be “printed up”, which limits the ability of governments to inflate the money supply.  But since all gold must ultimately be represented by paper in order to be useful as a money, obviously this undermines the check against inflation that gold brings to the table.

Another problem with paper representing gold is that paper is easily destroyed while gold is not.  This represents an accounting problem for banks issuing the paper.  If paper is destroyed, the gold that is represented by that paper still exists, but now that gold is in a state of limbo.  There is simply no way for the bank to know with any certainty that the paper was really destroyed.  Every bill that is lost puts the gold behind that bill permanently out of circulation (assuming the bank abides by standard accounting rules).  In a large banking system, this dilemma represents a real problem.

I argue that what “backs money” is unimportant. What matters is that the units of account that people use can not be inflated.  What matters is that I can not simply alter an account balance by plugging some numbers into a computer.

Fortunately for us today, such a currency exists.  It is called Bitcoin.  It is a decentralized peer-to-peer encrypted currency system that totally prevents arbitrary inflation of the units of account.  With bitcoins, one can not simply increase an account balance of Bitcoins by arbitrarily entering some numbers into a computer.   The actual currency itself is unreproducible.

In order to increase a Bitcoin account balance, the transaction must be validated against the entire peer-to-peer network.  The entire network knows the account balance of every wallet in existence and it will refuse any changes that attempt to alter number of Bitcoins in existence.  Bitcoin account balances simply can not be inflated.

This cryptographic method of approving transactions prevents arbitrary inflation of the money supply in a way a gold standard never could.  It stops fractional reserve banking before it ever gets started.  People don’t have to worry about banks defrauding them through fractional reserve banking under a Bitcoin standard because it literally can’t happen.  The FDIC would be completely out of a job.

Further, the destruction of Bitcoins is of no consequence other than to the person whose coins were lost.  This is because Bitcoins are basically infinitely divisible.  So as coins are lost for various reasons, it will simply drive up the price of the remaining coins.  No accounting issues are created by the destruction of the coins.

So to my libertarian brothers who think a gold standard will solve all our problems, I say you are leaving out the biggest problem of all!  The fact that gold must be represented by paper for it to function as a currency in our modern economy!  Do not forget about this issue or brush it aside. And do not dismiss crypto-currencies simply because they lack a gold backing.

Remember, the market should tell us what money is and what it is not.  And the market has spoken.  Bitcoins have value because the market says they have value.  They are not imposed by government decree.  They are not mandated by law.  They have value purely because people can see the inherent value in a token exchange system that is decentralized and impossible to inflate.

Bitcoins are real market money for the digital age.  They are the solution to the inflation of gold receipts by banks and governments.  They solve the fraud problems that pervade all commodity representation systems.

 

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